Public Bill Committee

[Mrs Linda Riordan in the Chair]

Clause 1  - CAA’s general duty

Amendment proposed (this day): 10, in clause1, page2, line14,leave out ‘and’ and insert—
‘(ea) the need to work with NATS, the Secretary of State and air transport service providers towards meeting the United Kingdom’s carbon reduction obligations,’.—(Jim Fitzpatrick.)

Question again proposed, That the amendment be made.

Linda Riordan: I remind the Committee that with this we are discussing the following: amendment 11, in clause1, page2, line14,at end insert—
‘(ea) the effect on the environment and on local communities of activities connected with the provision of airport operation services at the airport to which the licence relates,’.
Amendment 16, in clause2,page3,line5,leave out ‘and’ and insert—
‘(ca) the effect on the environment and on local communities of activities connected with the provision of airport operation services at the airport to which the licence relates, and’.

Theresa Villiers: I am delighted to see you in the Chair, Mrs Riordan. As I said at the end of the last sitting, the debate on this group of amendments has been good. We heard a thoughtful contribution from my hon. Friend the Member for Cambridge, who has great expertise on transport matters and a strong focus on the environment. I will, of course, consider carefully all the points that he made.
Other insightful contributions came from the hon. Members for North West Durham, for Blackley and Broughton, for Scunthorpe, for Bolton West and for Feltham and Heston, with pithy interventions by my hon. Friends the Members for Amber Valley and for Finchley and Golders Green. Although I cannot ask the Committee to support the amendments, it is not because I consider regulatory intervention on environmental issues unnecessary. I am unable to support the amendments because economic regulation is not the right vehicle for pursuing the important goal of reducing aviation’s environmental impact.
We heard this morning from the Opposition Front Bencher that the last Government took a different approach from the present Government. However, the differences are perhaps not quite as great as Opposition contributions suggest. The previous Government did consult on including text along the lines proposed in amendments 11 and 16, which we are considering in this group, but after a mixed consultation response, they decided to restrict themselves to a duty on the Civil Aviation Authority to have regard to airport operators’ legal obligations to comply with applicable environmental and planning law. Hence, before they left office, the last Government ended up broadly in the same place as the much more limited amendment 12, which we debated earlier.
For reasons that were discussed when we considered the last set of amendments, the current Government decided that the supplementary duty proposed had no substance. Such a duty is not needed, because the Bill already gives the CAA the power to authorise appropriate investments to meet environmental and planning law obligations. That is why the then Secretary of State decided in July 2010 not to include that duty in the Bill.
The previous Government did not advocate the wider, overarching environmental duty for which some Opposition Members expressed support; nor did they propose empowering the CAA to use economic regulation as a means of imposing environmental obligations on airports where those are not consistent with the primary duty or the attempt to replicate a functioning market. Ultimately, by the time they left office, they did not support amendments of the sort that we are considering in this group. Neither the last Government nor the present one considered that to be the right approach.
We accept fully the importance of addressing both the positive and negative externalities associated with airports’ activities. A number of hon. Members rightly highlighted the quality of life and health concerns relating to noise and, of course, the importance of addressing climate change and air quality issues. We believe that such issues must be addressed appropriately in relation to all airports, not just those that happen to be subject to economic regulation.
Environmental impacts are present at every airport, and it is fairer, more rational and more efficient to consider the aviation sector across the board when deciding what regulatory intervention is needed. For example, the European Union emissions trading scheme covers the whole airline sector in the European Union, and restrictions on noise are imposed at a range of airports around the country, some of which are subject to economic regulation and some of which are not.
As Dr Barry Humphreys from the British Air Transport Association pointed out in his evidence to the Committee, the CAA undertakes a number of functions, in addition to economic regulation, where it can and does have regard to environmental matters. An important example is provided by its work with NATS on airspace management. The Transport Act 2000 explicitly requires it to take into account environmental guidance from the Secretary of State, which she gives to the Civil Aviation Authority. If there is a case for imposing an environmental regulation on an airport, it is worth doing regardless of whether that airport happens to have substantial market power and falls within the scope of those airports subject to economic regulation.
I particularly want to respond to concerns raised by the shadow Minister on what I dub the Brian Ross point, highlighted by Brian Ross of AirportWatch and the Stop Stansted Expansion campaign. It is important to consider carefully the issue around voluntary investment in measures to mitigate the environmental impact of airports—the sort of market support schemes that the shadow Minister referred to. The Bill allows the CAA to authorise appropriate investment in measures that mitigate environmental impact, even where they are voluntarily undertaken.
That view was confirmed by the CAA. As the CAA commented clearly in its evidence, a system that safeguards the interests of end users and seeks to replicate a functioning market can and does embrace appropriate investment in environmental measures. That is because, as Iain Osborne of the CAA pointed out, unregulated airports across the world invest in environmental measures. Environmental investment has been allowed under the current rules despite the CAA having no explicit environmental duty in relation to economic regulation. That has been allowed even where the schemes in question are voluntary, as the examples presented to the Committee by the shadow Minister have evidenced.
Neither the current system nor the proposals in the Bill would impose on the CAA a requirement for investment on environmental matters that goes beyond the kind that could be delivered in a competitive market. That kind of environmental requirement should be applied fairly and evenly across the sector, taking on board the impact of different airports, regardless of whether they are subject to economic regulation. Such requirements should come with the sanction of Parliament and Ministers, rather than being delegated to the CAA in its capacity as economic regulator.
We already have an example of how the Government are using the Bill to apply a measure that goes across the airport and aviation sectors in a fair way—a measure that we believe will provide important environmental benefits that are much more significant than those delivered by an environmental supplementary duty in economic regulation, which we do not feel is the right way to address the question. An example of such a requirement is set out in clauses 83 to 93. The Government propose to take forward an information requirement that we consider to be more concrete and of more practical benefit to the public than the provisions in the amendments, and to provide a more realistic and sensible way to deliver environmental goals.
We will come to this in more detail in the later stages of the Bill, but the Bill gives the CAA a role in promoting better public information about airline and airport performance, the environmental impact of aviation, and the travel choices made by consumers. We believe that provision of that information will prove a useful addition, enabling the consumer to make informed choices and helping to drive up standards of service delivery. That has been strengthened in several ways since the 2009 consultation carried out by the previous Government. For example, the CAA may publish guidance and advice with a view to reducing, controlling or mitigating the adverse environmental effects of civil aviation in the UK.
We very much share the aim of addressing the local and carbon impact of aviation, but I am not convinced that the amendments in this group are the right way to deliver that. We believe that they are significantly flawed and not consistent with what the previous Government proposed to do before they left office. However, that does not mean we will not carefully consider the points made in today’s debate, or that we are not prepared to consider the matter again. We are particularly conscious of the points made in evidence given by the environmental groups. We will continue to keep the matter under careful consideration.

Graham Stringer: I have been listening carefully to the Minister, but I do not think she has answered my point about whether there will be a change in the regulatory asset base that the CAA uses.

Theresa Villiers: The framework is designed to give the CAA significant flexibility, so I cannot guarantee that absolutely everything that is currently in the regulatory asset base will stay there permanently. If the hon. Gentleman could remind me of whether he referred to a specific element of the regulatory asset base, I might be able to give him a clearer pointer.

Graham Stringer: Yes and no. Although environmental expenditure could be considered to have been in the regulatory asset base and has been in the past—that was the Government’s point when they were considering the overall environmental impact—the Committee was concerned about whether that would disappear.

Theresa Villiers: It is difficult to give advice on the RAB generally. However, there is every reason to believe that Heathrow Express, for example, which is a key part of the surface access to the airport and is currently on the regulatory asset base, will continue to be on the RAB. A common-sense understanding of what is in the passengers’ interests shows that it is in the passengers’ interests that a surface access project of that nature should continue to be part of the RAB. Indeed, the Bill also contains important transitional provisions to provide some assurance for investors about the continuity of financial arrangements from the old regime to the new regime. The combination of those factors makes me confident that things such as the Heathrow Express are likely to continue to be on the RAB under the new regime, just as they are now.
I conclude by saying that if the Opposition are not prepared to withdraw their amendment, I must ask hon. Members to oppose it.

Jim Fitzpatrick: It is a pleasure to see you presiding over business this afternoon, Mrs Riordan. We look forward to your chairmanship of the next few sittings.
We feel strongly about the three amendments, as has been made clear by my hon. Friends’ earlier contributions. We appreciate the endorsement by the hon. Member for Cambridge of the principle, if not of the actual words or, indeed, of his votes—one day, perhaps.
The Minister and the CAA accept that the CAA has a role to play in environmental matters—it had that role previously, and will continue to have it. However, the difference is that we are moving the goalposts in the Bill. We are changing the environment and creating a primary statutory duty to put the passenger at the centre of the CAA’s policy. On the rejection of our suggestion for a supplementary or secondary duty for airlines, the Minister rightly pointed out that the new appeals procedure has a much better way of dealing with regulatory price fixing and so on for airports. We accepted that as an amendment, and we agree that it will lead to an improved situation. However, there is no such right of appeal in respect of environmental matters. Certainly, we have clauses 84 and 85 on information reporting, and they are very welcome.
When the hon. Member for Amber Valley says that our amendments do not cover airlines, just airports, he misses the point. With respect to him, clause 68 defines airport operator services widely. If he looks at that, he will see that it clearly covers all aspects of airport operation, including take-off, landing and the rest. I hope that he accepts that we are in tune with the Bill’s definition of civil aviation. I have heard the Minister’s explanation, especially regarding the view of the previous Government.

Julian Huppert: We want to see the environmental work done, and I am afraid that the amendments do not do it. Unfortunately, clause 68(4) specifically excludes air transport services and air traffic services, which are defined in clause 69, so there is a technical problem with the hon. Gentleman’s amendments. I hope that he will withdraw them, so that we can have correct amendments that do what they are intended to do.

Jim Fitzpatrick: I hear what the hon. Gentleman says. We believe that our amendments are in line with our aims, and we will press them to a vote. I accept entirely that expectations are placed on the CAA in respect of environmental matters. As I said earlier, we fully support clauses 84 and 85 on information and publicity, but passenger choice of airport is determined not by green credentials but by convenience and price. We welcome the Minister’s commitment to keep the matter under careful consideration, but I regret to say that we are not persuaded either by that reassurance or that our amendments would not do the job that they were drafted to do, so we want to press them to a Division.

Question put, That the amendment be made.

The Committee divided: Ayes 10, Noes 12.

Question accordingly negatived.

Amendment proposed: 11, in clause1,page2,line14,at end insert—
‘(ea) the effect on the environment and on local communities of activities connected with the provision of airport operation services at the airport to which the licence relates,’.—(Jim Fitzpatrick.)

Question put, That the amendment be made.

The Committee divided: Ayes 10, Noes 12.

Question accordingly negatived.

Amendment proposed: 14, in clause1,page2,line14,at end insert—
‘(ea) the need to promote due consideration on the part of each holder of a licence under this Chapter of issues arising out of surface transport links to and from airports,’.—(Jim Fitzpatrick.)

Question put, That the amendment be made.

The Committee divided: Ayes 10, Noes 12.

Question accordingly negatived.

Linda Riordan: I understand from Sir Roger that the Committee has had a very wide-ranging debate on the amendments to the clause. I therefore expect the clause stand part debate to be short. Members should not attempt to go over ground that has already been covered in previous discussions.

Question proposed, That the clause stand part of the Bill.

Theresa Villiers: Abiding by your advice and guidance, Mrs Riordan, I do not propose to rehearse the reasons why the Government do not believe that supplementary duties on the environment and in relation to airlines are appropriate additions to the clause. I would like to focus on some other parts of the clause that have so far not been examined in detail by the Committee.
As we have considered, the clause delivers the primary duty to end users of air transport services, which is at the heart of the regulatory regime. Subsection (1) provides that the CAA must carry out its functions under chapter 1 of the Bill in a way that it considers will further the interests of passengers and owners of cargo, both present and future,
“regarding the range, availability, continuity, cost and quality of airport operation services.”
“Airport operation services” are defined in clause 68.
The proposed primary duty will be supplemented by a set of further duties to which the CAA must have regard in performing its primary duty, which cannot individually or collectively be overturned. The proposed duties replace the four equal duties imposed on the CAA under the present legislation governing airport economic regulation, which has been criticised both by the industry—by airports and airlines—and the Competition Commission. By replacing those with a primary duty, we will provide greater clarity on how the CAA is to discharge its economic regulation functions, and we will put consumers’ interests at the heart of the regulatory framework, as part of our agenda to improve our airports and international gateways.
I turn to the factors that the CAA must consider when performing its primary duty. First, subsection (3)(a) states that the CAA must have regard to
“the need to secure that each holder of a licence… is able to finance its provision of airport operation services”.
Although the CAA must promote the interests of end users, that supplementary duty confirms that the CAA has the power to encourage efficient and economic investment by allowing a reasonable return over time. It does not require the CAA to ensure the financing of regulated airports in all circumstances. It is likely to base its approach on the needs of a reasonable and efficient airport operator. That is achieved in a number of ways.
For example, the CAA has an equal supplementary duty to promote efficiency on the part of the licence holder. Furthermore, the financing duty is subordinate to the primary duty of furthering the interests of passengers. Increasing the price cap to enable an inefficient licence holder to obtain sufficient return to finance the airport is unlikely to be consistent with the duties to safeguard end users.
Secondly, subsection (3)(b), another part of the clause that we have not yet considered, requires the CAA to have regard to the
“need to secure that all reasonable demands for airport operation services are met”.
Subsection (3)(c) requires the CAA to have regard to
“the need to promote economy and efficiency”
by licence holders in the provision of airport operation services. Those duties aim to reflect the ultimate aim of economic regulation, which, as I mentioned this morning, is to seek to replicate the outcomes of a competitive market, where airports provide the services demanded by passengers at minimum cost.
Thirdly, subsection (3)(d) provides that the CAA must have regard to any guidance issued by the Secretary of State when carrying out its functions under chapter 1 of the Bill. That ensures that the Government’s views are considered by the CAA.
For the reasons that I have set out and discussed in relation to the amendments, I hope that the Committee will be able to support the clause.

Jim Fitzpatrick: When the discussion opened this morning, I was concerned about ensuring that all our points would be covered, and I asked Sir Roger for a stand part debate in case the amendments did not give us the opportunity to make them. However, we have registered during the discussions of the amendments that the Bill could go further, especially on environmental matters.
The majority of Committee members are clearly happy with the clause as it stands. Notwithstanding our efforts to add duties for the CAA to clause 1, we support the Bill. As I mentioned earlier, the framework contained in clause 1 and its six subsections will bring aviation regulation into the 21st century, and we support that.

Theresa Villiers: I have nothing further to add to my remarks. I agree that we have had an extensive debate. Clause 1 has been rigorously scrutinised.

Graham Stringer: This is a small question, but its answer may prove useful on Report. Subsection (3)(c) mentions the requirement to “promote economy and efficiency”. The Audit Commission always has three “e”s—economy, efficiency and effectiveness. Why is effectiveness not there?

Theresa Villiers: That is because we expect it to be in the interests of an airport to be as effective as possible. We are seeking to remedy those points where the market pressures on airports are not sufficient to deliver the desired outcomes, hence the emphasis on efficiency.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clause 2  - Secretary of State’s general duty

Amendment proposed: 16, in clause2,page3,line5,leave out ‘and’ and insert—
‘(ca) the effect on the environment and on local communities of activities connected with the provision of airport operation services at the airport to which the licence relates, and’.—(Jim Fitzpatrick.)

Question put, That the amendment be made.

The Committee divided: Ayes 8, Noes 12.

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Theresa Villiers: I am delighted to put forward the reasons why the Committee should support clause 2. It is similar to clause 1 in many ways, so I will probably not need to detain the Committee at length. Clause 2 reflects the fact that although a key tenet of the reform proposals are to transfer more powers to the CAA and take politicians out of key areas of airport economic regulation, as is consistent with best practice, the Secretary of State will still carry out certain important functions. Clause 2 seeks to impose on the Secretary of State, in carrying out those functions, broadly the same framework of duties that we discussed at length in relation to the CAA and clause 1.
Clause 2 provides that when the Secretary of State exercises any function under chapter 1 and most of chapter 3 of the Bill, she will be subject to the same primary duty as the CAA, and to similar, although not identical, supplementary duties. As is the case with the CAA, those additional duties will affect and inform the manner to which the primary duty is applied, but cannot override it. The overall effect of clause 2 means that where the Secretary of State issues guidance to the regulator, as she is empowered to do, she will need to have regard to the duties set out in clause 2 when making decisions. In particular, she must do so in a way that is consistent with the primary duty to passengers and owners of cargo.
The Secretary of State’s primary duty will be to:
“further the interests of users of air transport services regarding the range, availability, continuity, cost and quality of airport operation services…The Secretary of State must do so, where appropriate, by carrying out the functions in a manner which the Secretary of State considers will promote competition in the provision of airport operation services.”
As we discussed in relation to the CAA, there may be instances where different groups of end users have different priorities and conflicting interests. Clause 2 provides a similar way to reconcile and deal with those issues. There may be conflicts between the interests of users of air transport services where the Secretary of State carries out her functions with regard to the primary duty.
Clause 1(6) provides that if the Secretary of State considers there is a conflict between the interests of different classes of users of air transport services, or in the different matters referred to in subsection (1), she should carry out her functions so as to further such of those interests as she thinks best. So the discretion that we have conferred on the CAA is similarly conferred on the Secretary of State in dealing with this type of conflict of interest, which we discussed in relation to the earlier amendments.

Question put and agreed to.

Clause 2 accordingly ordered to stand part of the Bill.

Clause 3  - Prohibition

Question proposed, That the clause stand part of the Bill.

Theresa Villiers: The clause introduces a general prohibition on an operator levying charges for its airport operation services where an operator of a dominant area at a dominant airport does not have licence. It is subject to limited exceptions both in the clause and in clause 4. This clause would incentivise operators of a dominant area at a dominant airport to apply for a licence and bring themselves under regulatory control. It is the mechanism needed to bring about that result. If this clause were deleted, there would be no means to compel a person who becomes the operator of a dominant area at a dominant airport to submit to economic regulation. This approach is based on the Airports Act 1986, which prohibits operators subject to regulation from levying charges without permission.
The prohibition applies to all charges for airport operation services levied by the relevant operator at the airport, not just those levied in respect of the dominant airport area for which the licence is required. So, for example, if a licence was required for a runway, the operator could not levy charges for services provided by it at the terminal until the operator gets a licence. This is subject to some technical exceptions set out in subsection (8), which relate to charges such as penalties payable by airlines under other legislation. That is set out in subsection (2). The reasons for that subsection are to provide a strong incentive for a person to seek a licence in order for the CAA to regulate them in their provision of airport operation services. The licence must include a provision specifying the area covered by the licence.
Subsection (2) applies if a licensed operator of one dominant area at an airport becomes the operator of another dominant area. Where the new area is not covered in its existing licence, the prohibition on charging would apply to the newly acquired dominant area and any other area within the airport operated by that person, which is not covered by its original licence. For example, if an operator had a licence for a cargo processing area and it acquired a terminal, it could not recover rent in relation to the terminal until it was licensed.
Under subsection (3), “operator” is for these purposes given an extended meaning to include others such as persons connected to the operator, and persons to whom the operator or a person connected to it has assigned to require payment of a charge. This is an anti-avoidance provision. Subsection (4) provides that if a person requires payment of a charge in breach of these provisions, it is not recoverable by that person and if it has been paid, it is recoverable from that person. Subsections (5) to (7) provide a limited exception to the prohibition. It applies where there is an appeal in respect of a market power determination or an operator determination that is invalid. In such circumstances, charges are recoverable despite subsection (4) in the period before the invalidity is finally determined.
The provisions are considered necessary to provide appropriate commercial certainty in the event of such litigation against a determination that a person is not the operator of an area and/or a determination that the area is not a dominant area at a dominant airport. If litigation on either of these points resulted in the decision being quashed, but for these clauses, the airport operator could be required to repay charges to airlines and others for services that it had provided in good faith. We cannot reasonably expect airports to provide services over significant periods when they are unclear whether they can recover their charges. It would be necessary for airports to seek to price in this risk, which would be likely to raise costs for passengers, and is therefore not something we want to encourage. With that explanation, I hope that hon. Members will consider supporting the clause.

Question put and agreed to.

Clause 3 accordingly ordered to stand part of the Bill.

Clause 4  - Prohibition

Question proposed, That the clause stand part of the Bill.

Theresa Villiers: I can be brief, as the clause is straightforward. The clause introduces an exemption to the prohibition on levying charges in clause 3, which I just outlined for the Committee. It applies where a person is the operator of an airport area on the day when the area or part of the area becomes a dominant area at a dominant airport. In such cases, the effect of subsection (2) is that the operator is exempt from the prohibition until a licence for that airport area is granted or certain other stated circumstances arise. Such circumstances are generally situations in which a licence would not be required.
The clause will protect existing operators of airport areas who would otherwise become subject to the prohibition without proper opportunity to obtain a licence. I commend the clause to the Committee.

Question put and agreed to.

Clause 4 accordingly ordered to stand part of the Bill.

Clause 5  - Prohibition: exemption

Question proposed, That the clause stand part of the Bill.

Theresa Villiers: The clause defines what comprises a dominant airport area and a dominant airport. Under subsection (3), “airport area” means an area that consists of or forms part of an airport, including land and buildings. The provision is included to allow for the possibility of there being more than one operator at an individual airport. That could be the case if, for example, an airline acquired or leased a terminal building. As there can be more than one airport area at an airport, it follows that there can be more than one operator of an airport area.
Subsection (1) states that an airport area is dominant if the CAA has made a determination that the market power test is met in relation to the area and publishes a notice to that effect. Subsection (2) provides that an airport is dominant if all or part of its core area is a dominant area or part of a dominant area. Subsection (4) describes what comprises a core area: broadly speaking, the core area includes runways and associated facilities, passenger terminals and cargo processing areas.
It follows that non-core airport areas include car parks with pedestrian access to the terminal building, or the forecourt of a passenger terminal including pick-up and drop-off points. Therefore, if the only dominant airport area at airport X comprises the pick-up and drop-off points, airport X would not be a dominant airport, because no part of the core area would comprise or be included in a dominant area. In such circumstances, no part of the airport could be subject to regulation.
The rationale is to ensure that no part of an airport is subject to regulation unless some part of the core area is dominant. That construction is required to prevent unnecessary regulation where there is a problem only with peripheral areas. I commend the clause to the Committee.

Nicholas Dakin: It is a pleasure to serve under your chairmanship, Mrs Riordan. I rise to draw attention to the evidence that we heard on the clause from Emma Gilthorpe of BAA and to give the Minister the opportunity to deal with it. She outlined in detail the purpose of the clause, but it sounded complicated to me, and that was the concern raised by Emma Gilthorpe. She said:
“My concern is that the way clause 5 is constructed is incredibly complicated and quite difficult to interpret”,
although maybe the Minister did well at interpreting it. None the less, that is the concern of people in the business.
Emma Gilthorpe gave an example, saying that,
“it is unclear to me whether, for instance, some of the rail assets, particularly Heathrow Express—a service that is very much prized by passengers using Heathrow as an integrated hub—would be in or outside of the regulatory construct. If it was not in, no business case would support private investment in Heathrow Express.”
She continued:
“It is very important that we get these parameters clear and predictable”—
the key word is “predictability”—
“so that future investments are not impaired.”––[Official Report, Civil Aviation Public Bill Committee, 21 February 2012; c. 8, Q6.]
Emma Gilthorpe felt that a simpler construction would best deliver that. I make that contribution just to give the Minister an opportunity to deal with those points raised in evidence to us.

Theresa Villiers: I would be happy to do that. I am grateful to the hon. Gentleman for raising the points. I acknowledge that there is a degree of complexity in the clause. The overall result of our reform of airport economic regulation will be to inject far more clarity than there is currently, but yes, in this clause, there is some complexity. One of the main reasons for that is the Government’s decision to keep open the option of inter-terminal competition in future. That was touched on in the discussions with witnesses. The Competition Commission is not currently saying, “Let’s go ahead with it,” but it is something that it has considered in the past. It is in use at some airports in the United States, JFK being the obvious example.
The Competition Commission’s view was that it would be useful if we kept this open as an option for the future, so the Bill is drafted to ensure that if, in future, the Competition Commission decided that the best way to protect the interests of end-users was through competition within airports, it would not be necessary for the Government of the day to return to Parliament to ask for an amendment to the regulatory regime to enable that to happen. The Bill does not in any sense mandate inter-terminal competition. It merely means that we are doing our best to futureproof the regulatory system, so that if a future Competition Commission decided that that was the best way to protect passengers, the regulatory system would be capable of dealing with that.
On the specific point about the Heathrow Express, which has come up a few times, I understand BAA’s technical concerns about the matter. We are keen to explore them with BAA. As I said this morning, I am confident about important surface infrastructure such as the Heathrow Express; there is every likelihood that that would continue to be on the regulated asset base. As I said in response to the point raised by the hon. Member for Blackley and Broughton, it is probably not possible for me as a Minister to give 100% cast-iron guarantees on that kind of thing. There is a degree of legal risk whatever one does, but with regard to investments of that type, they are on the regulated asset base at the moment, so one would expect that to continue under the new regime, because the Heathrow Express is manifestly a provision that benefits end-users.

Question put and agreed to.

Clause 5 accordingly ordered to stand part of the Bill.

Clause 6  - Market power test

Graham Stringer: I beg to move amendment 7, in clause 6, page 5, line 22, leave out
‘, or is likely to acquire,’
and insert
‘had for a period of at least 24 months’.
It is a pleasure to serve for the first time on a Committee that you are chairing, Mrs Riordan. The amendment is designed to probe the Government’s real views on deregulation and the regulatory burden. I know what the Government’s rhetoric is—that they are removing one existing regulation for every one that they introduce and that they are reducing the regulatory burden. However, this Bill as a whole seems to be increasing the regulatory burden.
I shall just go through a few of the questions that the Minister answered during pre-legislative scrutiny. She is always straightforward with her answers, and I have the greatest respect for her, but I think that she is getting the regulatory impact assessment and the regulatory burden wrong. In response to recent questions about the air travel organisers’ licence, which is covered later in the Bill, the Minister made it clear that her preference was for a market solution to the ATOL problem, but in fact we have extended regulation.
When the Minister was recently before the Transport Committee on the draft Bill, I asked her in Q162 whether the Bill was deregulatory. She replied:
“The regulatory impact demonstrates that this new regulatory system will cost considerably less for airports to operate.”
She then brought in her official, but in answer to Q163, she repeated:
“The assessment we have done is that this will cost airports and airlines less to operate than the current system”.
That is clear.
When I checked with Manchester Airports Group about the regulatory impact, it was clear that in its estimate there would be an increased regulatory burden of £274,500, which is not a huge amount for an airport the size of Manchester airport, but it represents a huge percentage increase in the regulatory burden. That is not the main thrust of the amendment, but I am talking generally about regulation. I can give the Minister the calculations if she wishes. We may come back to that later in the Bill. It is not so much the figure, which I accept is not huge, but the fact that it is an increase, and there are increases elsewhere in the system. East Midlands airport has done a similar calculation for me, which also shows an increase of a third in the regulatory burden.
The amendment is a very strong deregulatory proposal, and I have not plucked it out of thin air. I refer the Minister to the original report from the 2005-06 Transport Committee, “The Work of the Civil Aviation Authority”. Paragraph 128 on page 45 states:
“We recommend that the Government review the continuing need for the designation of airports subject to economic regulation by the CAA as a matter of principle, and that it publish an assessment of the relative merits of this approach compared to the use of standard competition legislation to regulate the abuse of dominant position by airports. The Government should consider de-designating Manchester and Stansted as a first step.”
It goes on to say, not as a recommendation, but in supporting script:
“This review should be informed by experiences in other countries, such as Australia, where price controls were removed in 2002.”
That recommendation forms the basis of the amendment. Remember: it was a Committee with a significant Labour majority and the report received all-party support. For a more modest basis for the amendment, when I asked the Minister in the Transport Committee why there should not be deregulation of airports other than Heathrow, she said that it was not in the passengers’ interests. The principle of the amendment is to say, “Let’s try it first.”
The core issue in the Bill is a market test that decides which airports will be regulated under the Bill. If one looks in detail at what is happening in the marketplace, one can see huge amounts of competition. Since Manchester airport was deregulated—in 2009, I think—there has been greater efficiency, greater effectiveness and greater economy, because it is in serious competition with Liverpool airport, Robin Hood airport, Birmingham airport and Stansted airport. It is also in competition with European hubs, albeit at a minor level compared to the larger British airports such as Heathrow, because it has intercontinental flights.
The same case can be made for the London airports in a way that was more difficult to make in 2006, when the original recommendation was made, because BAA then was one body. Since 2006, Gatwick airport has been sold and there is a recommendation—opposed by BAA—to sell Stansted airport. However, if one looks at the market in the south-east of England, one sees that Gatwick airport is competing with Heathrow; one has only to talk to the owners of Gatwick to realise that. If Stansted becomes separate from BAA, it will compete with both Gatwick and Heathrow; it will compete more for the point-to-point low-cost carriers and the package carriers than for other carriers, but it will compete. There will be a three-way competition.
More importantly, however, as I mentioned during the previous discussion, Heathrow is in a fight for its life against airports such as Charles de Gaulle, Schiphol, Frankfurt, Copenhagen and Madrid, whose Governments have had the sense to allow them to expand and increase collectively by far more runways than there are in the south-east of England. So the amendment is saying, “Let’s have 24 months, look at how the market works and see whether the Minister’s contention—that it is for the benefit of passengers to carry on with the current regulation—is right, or whether it is actually for the benefit of passengers to allow the market to determine the charges.”

Jim Fitzpatrick: I am curious about how my hon. Friend arrived at the period of 24 months. Is it because of an examination of the Select Committee’s early report, and the recommendations that he mentioned, or is it because of some economic instrument that he has come across?

Graham Stringer: It was slightly better than an estimate off the top of my head. I thought that if we were going to see whether the passenger was going to suffer or benefit, we would need to go through two annual cycles, because airports really work on a summer season and a winter season; even an airport such as Heathrow, which is essentially full, works on that seasonal basis. That was where the 24-month period came from. It could be 36 months. This is a probing amendment, so the period could be varied; it could be for two years and then it could be extended by two years if there were no problems. There are lots of different ways of doing things, but it is worth looking at the free market competitive solution rather than having the CAA determine which airports are to be regulated.

Gavin Shuker: I note that to put in that 24-month period, my hon. Friend has chosen to delete the words, “is likely to acquire”. Can he say a little more about why it is important to delete those words? My question is meant to be helpful; I apologise if it is not.

Graham Stringer: The amendment is really a vehicle for testing this debate. The clause is basically saying that airports that are dominant in their market, or that are likely to acquire that market domination, should be regulated. The reason why the amendment would delete the word “acquire” is that we do not know what is happening; let us first have a look at what the market is doing.
The Bill has all the hallmarks of a Bill that the Labour Government were putting through in detail, but it has not been examined as thoroughly as it should be. Otherwise, we would not be told that parts of it are removing burdens from airports when they are clearly putting burdens on airports.
I also want to talk a little about having a free market solution and about the scarce economic resource that the two runways at Heathrow are. How the previous regulatory system worked was, in many ways, perverse. The runways at Heathrow airport are an incredibly scarce resource and, because a lot of people go through Heathrow, it is easy to achieve a return on capital expenditure, so the price over many years has been driven down. So Heathrow gets more and more crowded, even after the building of terminal 5.
In the previous review at Heathrow, the cost limit was only RPI plus 7.5%, which, given the size of terminal 5 —it was £5 billion or some such huge figure—is a small percentage increase after years and years of landing charges being forced down by a perverse formula.
Similarly, at Gatwick the cost limit is RPI plus 2%, and at Stansted there is no increase whatever. So Gatwick is below real inflation and Stansted is a good deal below inflation because the cost limit is at zero. Would it not have been more sensible, particularly at Heathrow, to allow airports to charge more? They are a scarce resource and some aeroplanes with grandfather rights have been landing there for a long time at relatively low charges, which is not the best way to determine how we run the south-east airports.
I do not want to repeat our earlier debate on whether there should be a third runway at Heathrow. Clearly, I, like other members of the Committee, think there should be, but for now there will not be one. So what does one do about trying to keep British aviation as eminent as it is in world aviation? That is difficult if we are not going to build more runways and we do not have the right to control where airlines go, but it seems to me that there are three possible reforms related to the amendment.
First, the real economic cost could be charged for landing at Heathrow. Secondly, we could consider the allocation of slots, because there are still some small planes using slots at Heathrow airport because they have grandfather rights. There is a grey market in those slots that needs to be regulated and made transparent so that the market can determine what is the best aeroplane to land at Heathrow in terms of who is willing to pay.
If that were done, the unjustified criticism levelled by Ken Livingstone and Boris Johnson that there is no need for a third runway at Heathrow would disappear. They say that there are still charter flights going out of Heathrow to Tenerife, or wherever, which is because a plane or airline that has had a slot for 10 or 20 years can keep it. It would be much easier for the country to get the best use out of Heathrow airport and the runways if we had a market solution through both regulation and the allocation of runway slots.
Even for 24 months, are passengers going to be terribly vulnerable? One has to remember that, although the Civil Aviation Authority had previously been the only economic regulator of airports, since European directive 2009/12/EC the 10 largest airports in the United Kingdom have been regulated from Europe. Even though I have argued for this amendment, which would take all the airports in the United Kingdom out of economic regulation by the CAA, there would be a more general European level of regulation, which, if people were worried about protection for passengers and airlines, would be there.
I hope that that has given the Government something to think about, because I think—I know—that Conservative MPs go back to their constituencies and complain about gold-plating legislation and unnecessary regulation. Government Members should think hard about this Bill, because it seems that it increases the regulatory burden. There is a way through this, without very much risk—to have a free-market solution to at least some of the problems of the south-east.
This is not some wild idea; it went through an all-party Select Committee some years ago. I have had personal discussions with people from airports—not in the past 12 months, but over a number of years—about a situation where we have a surplus of runways throughout the country, but a scarcity of runways in the south-east. As we cannot direct planes as to where they will land, it would be sensible to look for a market solution, rather than more regulation.

Mark Reckless: It is a pleasure to follow the hon. Gentleman and his interesting proposal, which has some even more interesting economic analysis.
The usual rationale for a regulator is monopoly power, as we see here with airports. Left to themselves, one might expect those airports to set their price at a rate that maximises their monopoly profits at a level significantly above marginal cost. The gains to the operator of the airport from that extra profit are greater than the losses to the consumer, because of how they are priced.
When we come to airports, however, and the experience of both the air traveller and the freight owners, the charge at the airport is just one relatively small part of the overall price of the air fare and of the overall experience in terms of their use of the aviation industry. Giving the CAA a single duty in the Bill to promote and act in the consumer’s best interest, be that the passenger or the freight owner, is not necessarily set against what the hon. Member for Blackley and Broughton has described.
When one looks at the users of Heathrow and the business use—the relatively high fares in business class, the types of destination that people are going to and the long-haul nature of many of the flights—we see that if we could get better reliability at Heathrow, that would be a gain to those users far greater than the charge that might be added.
We could see a regime where, for instance, the CAA thought that the consumer interest was that there should be an element of spare capacity at Heathrow and that prices were being held down or that that was being stopped from happening. If the CAA allowed those landing charges to rise significantly in terms of proportion, but not so significantly in terms of the overall cost of the air ticket and the value to the user, we might see a regime where there was more spare capacity and more resilience at Heathrow.
Were some of the flights to which the hon. Gentleman referred to move away from Heathrow—be they charters or flights to lower-value destinations or some prestige destinations, or ones that have just grandfathered and happen to have always been from there—that would lead to a greater amount of excess capacity and we could see other airports come in. That could be, for example, Gatwick, with a potential second runway beyond 2019, or Birmingham, which has a lot of existing capacity and which will be connected in by HS2, so that it will be 30 minutes to Old Oak Common or 40 minutes to Euston. That could lead to a more market-orientated system.
The CAA is a regulator respected by most or all hon. Members. Can that regulator not be allowed to focus on consumer interests? If the consumer interest at Heathrow is not having the lowest possible landing charge, but having a more resilient and reliable airport to serve the needs of “just in time” for freight, and reliable quality transport and timing for business operators, the CAA might hear what the hon. Member for Blackley and Broughton said and, in promoting the interests of the consumer and the freight owners, take those views into account.

Nigel Mills: I was going to make these remarks in a stand part debate, but they will fit naturally here. The clause uses the definition of what triggers a regulation as “substantial market power” as opposed to dominance. As the hon. Member for Blackley and Broughton said, a lot of the regulation on airports now is from the European Union. EU directives on competition refer to dominance and not substantial market power in the way they drive their tests. Here we are legislating with regard to the CAA using the term “substantial market power”.
There is a subtle difference between the meanings of dominance and substantial market power. We may end up with more airports getting regulated using the test we are proposing rather than the one we could have proposed. There is also some uncertainty in the definition as it flies backwards and forwards through the Bill. Although we use “substantial market power” in clause 6 to define where we need regulation, in clauses 3 and 5 we go back to “dominant”. Clause 5 is titled “Dominant areas and dominant airports” and clause 3 mentions “dominant airport”. It is almost as if we have switched from “substantial market power” to “dominant” and back again.
It is instructive to read some of guidance issued by the Office of Fair Trading. Recognising that the EU directives talk of “dominant”, it talks about market power being a useful way of determining what is dominant. The CAA’s own final competition assessment guidelines talk about substantial market power being an abuse of a dominant position. We seem to be exchanging terms. It may be much clearer just to go for a definition of dominance, which has a clear definition in the EU treaties. I think all players in the industry understand what the test is.
To illustrate that, the OFT’s guidance sets out that the European Court has said that if an entity has a market power of more than 50% it will be assumed to have dominance and therefore regulation could apply. OFT says further that if the market share is more than 40% there might be a need for regulation. I do not think that any airport other than Heathrow has more than 40% market share. Gatwick is probably the closest to that, although I doubt whether it has that percentage in any segment. I think it has some 23% of the UK holiday market, 15% of the UK business market—nowhere near that dominance threshold of 40% or 50%.
Looking at London or the south-east, obviously the percentages are much higher, but they still do not get anywhere near the 50% test that would trigger automatic dominance. When the CAA publishes its preliminary assessments of substantial market power, it carries out a long exercise on Gatwick and Stansted to try to work out if it can justify regulating either of those airports. It goes through every segment of travel and area to try to get to a threshold where it can apply the regulation. Perhaps I should not say “try to get to a threshold”. However, it appears to start from a position that those airports are regulated, and appears to want to keep them that way. I agree with the hon. Member for Blackley and Broughton and my hon. Friend the Member for Rochester and Strood that we should regulate airports only where is a definite need to do so, and where there is a real advantage to the user, rather than looking to regulate unless we can find a way out of it. When reflecting on the Bill, I urge the Minister to consider whether, either accidentally or deliberately, using the definition of substantial market power rather than dominance will give the CAA more freedom to regulate airports than we intend.
Let us consider the scenario in which East Midlands airport has more than 40% of the UK freight market—a scenario that could trigger such issues. Moving freight at airports is incredibly easy. I suspect that all airports move freight—it simply has to be driven a few extra miles down the road before it goes on a plane. I cannot see any need for regulation in such circumstances; we certainly could not say that that constituted market dominance. However, when we start applying different factors in choosing markets, segments and areas, a scenario could arise in which we attempt to regulate, and the last thing any of us wants is the CAA to decide in a few years’ time that it is time to regulate a few more airports to justify its existence. Using the word “dominance” would give a clearer definition and would be consistent with the European treaty. All the operators in the industry would have a clearer definition of the rules they have to apply.

Theresa Villiers: I am grateful to members of the Committee for their contributions to the debate on the amendment, especially the hon. Member for Blackley and Broughton, who tabled it. He has great expertise in aviation and his input on such matters in Parliament is much valued. I cannot support his amendment for various reasons that I shall share with the Committee. I shall also deal with some of his broader points, and I am grateful for his explanation that the amendment is essentially probing, rather than likely to be pressed to a Division.
In effect, the amendment would raise the bar to test whether an airport was subject to economic regulation under clause 6. The three tests it would amend are well understood and broadly accepted by the industry. The significant change proposed to the wording of test A could, in practice, mean that airports that should be subject to economic regulation fall outside the CAA’s remit. Of course, I agree that we should not regulate airports when doing so is unnecessary, overly burdensome or not in the passengers’ interests. However, such matters are dealt with properly under the current wording of clause 6.
There is a real risk that an airport could abuse its market position to the detriment of passengers if the amendment were accepted. If there were a real risk of an airport abusing its market position, we should give the CAA the necessary powers to protect the interests of passengers. It would not be in passengers’ interests to require the CAA to wait for at least two years before it was able to act under chapter 1 of the Bill. If a regulatory regime were justified, it would be important to ensure that it could be applied in a timely way. To be effective, we should give the CAA the power to intervene proactively and speedily when the tests set out under the clause are met. I am worried that the amendment would leave passengers and freight owners unprotected for a protracted period.
I turn to the broader points made by the hon. Member for Blackley and Broughton. When debating regulation with him, I keep finding myself in the peculiar position of opting for an approach that is more regulatory than his. It is a demonstration that, while the coalition is absolutely firm on the need to minimise unnecessary burdens on business, we accept that proportionate regulation has its place and can achieve important goals—in this case, the protection of passengers and owners of cargo from exploitation by airports that enjoy substantial market power.
The hon. Gentleman began by considering the cost impact of the Bill as a whole. Our estimate in our published impact assessment is that, over 20 years, the Bill will reduce economic regulation costs in the aviation industry by about £160 million. There will be a small additional cost, the present value of which would be £10 million, meaning a net reduction over the 20 years, in present value terms, of £150 million. I note the estimate the hon. Gentleman gave in relation to Manchester. Of course, we strive to minimise burdens on business, but we believe that overall the Bill will reduce costs for the aviation industry, which is one of its benefits.
I welcome the input of the Manchester Airports Group. Manchester airport is not only a high quality airport and an important part of the north of England’s economy; it is also proactively involved in debates on airport policy generally. It has done extremely well with its pilot of security scanners, for example. It is always good to have the input of Manchester airport.
The hon. Gentleman argued that it might be more sensible to rely on general principles of competition, rather than having a specific regime for airports. In the test set out in clause 6, we build in a protection whereby resort to specific airport economic regulations is justified only where the CAA can conclude not only that the benefits will outweigh the costs, but that the mechanisms available under general principles of competition law will not be sufficient.
The hon. Gentleman seemed anxious about the possibility of extension of regulation, and expressed concern that Gatwick and Stansted continue to be regulated when there is a debate about whether they should be. Under both the present and what we hope will be the future system, it is open at any time for any airport that is currently regulated to ask for a review. Another advantage, which I hope will provide some reassurance to the hon. Gentleman, is that the current regime is very binary—one is either subject to a five-yearly price cap or not. There are almost no other options available to the regulator. One advantage of the proposed changes is that they give the regulator a spectrum of options, depending on the seriousness of the problem. They could involve such measures as price monitoring. That will give the CAA the flexibility to have regard to and use measures that are potentially more proportionate than a heavy-handed, once-every-five-years set of price controls.
The hon. Gentleman referred to the competitive pressure on regional airports. I agree that that is so—not least in these difficult economic times—and that, to an extent, Heathrow faces competition from other European hubs. The thrust of the Bill is to get those decisions out of the political arena—currently, they are taken by the Secretary of State, albeit with advice from the CAA—and give them to an independent regulator. That will be fairer and will take the politics out of the system.

Gavin Shuker: Is Heathrow likely to remain subject to the market power test under the Bill?

Theresa Villiers: The Bill provides for transitional arrangements, so that airports that are currently regulated can be carried over automatically into the new system. As there is considerable overlap with the substantial market power test—that is one of the reasons why we selected this provision: it reflects current practice—there must be a strong likelihood that the application of that test under the new regime will be broadly similar to its application under the current regime. It is therefore likely that the airports that are currently regulated will continue to be regulated, but, as I have said, that is for the CAA to decide. At any time, those airports can come forward with a request to be deregulated.
Another specific problem with the amendment is that it might be inconsistent with the airport charges directive. The hon. Member for Blackley and Broughton made some interesting points about slots. However, he will appreciate that the House’s options regarding slots are somewhat limited, as this matter is determined by European law and governed by an independent organisation, as required by European law. The airports package currently being discussed in Brussels gives us the opportunity to look at related issues, so I will take his contribution on board in those future discussions.
I should like to deal now with the points made by my hon. Friend the Member for Amber Valley, which were also referred to on Second Reading, about the interaction of the terms “dominance” and “substantial market power”. The first thing I need to emphasise is that “dominance” in this context is not used in the same way as in general competition law. Here, it has a specific meaning. There are a number of reasons why we have opted to focus the test on “substantial market power”. The previous Government consulted on the test and received a broadly positive response on the retention of “substantial market power”. It is based, crucially, on the designation criteria that the Secretary of State currently uses, so we are not heading into uncharted territory.
As I mentioned in relation to the point made by the hon. Member for Luton South, there are established decisions on this matter already, so we are seeking to maintain a degree of continuity. The industry is familiar with a “substantial market power” test and how it works. We carefully considered the distinction between the two terms as progress was made in drafting the Bill, and the decision was taken not to equate “substantial market power” with “dominance” in the sense that it is used elsewhere in competition law rules.
I hope that provides some clarity, and I ask Members to oppose the amendment if it is not withdrawn.

Graham Stringer: This is a probing amendment and I will withdraw it, but there is enough in the debate about it for us to return to it in a different form on Report.
I should like to reply to two or three of the points that have been made. The hon. Member for Rochester and Strood argued that perhaps if the CAA looked creatively at the interests of the passenger at Heathrow, it would get the regulation right. What matters to many of the passengers at Heathrow is reliability. Reliability is just not possible when both runways are being used at about 99% capacity. The people there do an extraordinarily good job to get so many planes in and out every day, but things go wrong—planes come in without fuel; there are delays of one sort or another. It is not always possible to get complete reliability when the runways are used at that level.
The purpose of my amendment is to point out that it is not simply a question of whether the Bill is more burdensome and to ask whether the CAA can really stand in the place of the consumer—the passenger who pays for the air ticket. We have assumed in all the debates so far that there is a homogenous passenger and that it is the same if that passenger is flying from Liverpool using Ryanair or is a filthy rich banker flying first class to New York. Clearly, their interests would not be the same.
When I fly Ryanair from Liverpool, I know it will be cheap and cheerful. It is pretty reliable, low cost and I get where I want to go. I have never been a filthy rich banker, but from time to time, usually when other people have been paying, I have travelled business or first class—a new expense—and one expects and wants a different service. Reliability is important.
The hon. Gentleman has more faith than I do in the CAA’s or any bureaucracy’s ability to distinguish between those demands. The market is much more segregated than between the Ryanair passenger and the extremely rich person who can purchase a ticket.

Mark Reckless: I have no great faith in bureaucracy. What is special is the structure of the market. Were the price charged to the airlines by the airport operator at Heathrow to rise, it is not clear in an economic analysis that that would harm the end consumer. It is at least as likely that it will simply reduce the value of the slot. It is the scarcity of slots that allows the airlines their monopoly power in pricing. If the cost to them rises, the cost to the consumer might stay the same, but the value of the slot will fall. Because more money is going in, it might benefit the consumer in that way.

Graham Stringer: That is a different and significant point about how a full market solution might work. We are only partly there, but I understand what the hon. Gentleman says. It is a powerful point.
The hon. Member for Amber Valley shared, I think, my scepticism about the interventions that the CAA might make. Maybe it was a trite debating point, but it shows the power that the CAA could have if it were to start talking about where coffee, hot dogs or whatever are sold. It is a relatively small point, and I do not think that it is likely to happen in the real world, but it represents the fact that the CAA, under the Bill, can intervene more often and more regularly in the airports. Hopefully, it will understand passengers’ needs, which often differ; I doubt it, having dealt with the CAA. It is good at many things, but I am not sure that it would be able to stand in the place of the passenger. That has never been tested, as this is a new Bill.
Although if we are to have an economic regulator, it makes sense for it to intervene when there is a problem, the Bill gives the regulator the power to intervene too often and, frankly, in a burdensome and nuisance-causing way. If a bureaucracy is given a power, the worry must be that it will use it. It certainly worries me a lot that we are transferring from a costly, double-edged process held once every five years to something that could happen fairly regularly. We are relying a lot on the good will of the CAA.
That brings me to the Minister’s first point about the process leaving passengers vulnerable for 24 months if things go pear-shaped. Again, I am not wedded to 24 months. The point of the amendment is to reverse the process. Any assessment of substantial market power or dominance will always have a theoretical basis, whereas if we let the market rule and let Heathrow, with only two runways, do what it can to compete with Frankfurt, Charles de Gaulle and so on, it might go mad, price itself out of the market and do awful things. However, I doubt that the people who run Heathrow would do that.
The Minister makes a sensible case: if something awful happens and intervention is needed, and considering how the market really behaves, we should give somebody the power to intervene quickly, whether it is the Secretary of State or the CAA. I accept that general point, but I still argue that it would be interesting to test the market in a world where airports and airlines compete very differently from how they competed 30 years ago. It would be interesting to try that.

Nigel Mills: Does the hon. Gentleman agree that a slightly perverse outcome of making BAA sell Gatwick and Stansted is that we end up with all three airports still being regulated, on the basis that they somehow have a dominant position over the market in London and the south-east? It is a bit of a nonsense, but looking at what the CAA has published, that seems to be what it wants to achieve.

Graham Stringer: I could not agree more. As the hon. Gentleman heard in the comment that I read out from the 2006 report, the Transport Committee was looking then, as a first step to getting more competition within the London markets, at taking Stansted out of BAA’s ownership, so deregulating it, or, effectively, not economically regulating it. It is very strange for the Competition Commission to suggest breaking up BAA—a sensible thing to do; the Transport Committee has been recommending that since 1998—and then say, “We will still regulate you as though you weren’t dominant.” The hon. Gentleman is right; why create a competitive situation but still keep control of the charges? It is a nonsensical response to that agenda.
I will withdraw the amendment, but I hope we can return—if not with exactly the same amendment—to the issue of whether the Bill is burdensome, and potentially gives too much power to the CAA to interfere. It is one thing, as the Minister says, to take it out of the political arena, but another to create a bureaucracy in which there is no democratic control on it if things go wrong. I am worried about that issue and certainly think it worthy of further discussion on Report. However, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Theresa Villiers: It will be useful to dwell for a moment on the substantial market power test. It is envisaged that in conducting the market power test, the CAA will take due account of all applicable guidelines and recommendations relating to the analysis of markets and market power that have been produced by the UK and European competition authorities.
As I said, “substantial market power”, in test A of clause 6, is the term in the current criteria used by the Secretary of State, when designation decisions are made over whether an airport should be subject to price control. It is well understood and accepted in that context. The previous Government consulted on the wording of that limb and other limbs of the test for whether an airport should be subject to economic regulation. In light of that consultation, we do not see a reason to change the wording.
In carrying out test A, the CAA expects to follow the guidelines published by the Office of Fair Trading and the European Commission for the assessment of market power. Those are generic guidelines for use in any industry and provide a useful starting point for assessing the degree of competition faced by an airport. To work out the most appropriate regulatory activity, the CAA undertakes economic analysis of the degree of market power held by the airports in question.
The core matters that the CAA will be examining are the standard issues looked at in competition assessment—not only by the CAA, but by the OFT and other competition regulators. Essentially, the CAA will be looking at whether the airport can act independently of its competitors or customers, and whether the airport delivers sustainable, high quality and good-value services, as would exist in a well-functioning, competitive market.
In general terms, assessing the degree of market power involves the evaluation of two main issues. First, there is the degree to which passengers, cargo owners and airlines can reduce their use of the airport if they do not consider the price-service offering to be reasonable. The ability of customers to go elsewhere, or to switch some or all of the business away from the airport, is likely to depend on a number of factors, which a competition assessment seeks to explore in a structured manner. Secondly, the CAA will need to consider whether the extent to which customers are likely to switch away from the airport will be sufficient to discipline its pricing, service quality and investment decisions.
Substantial market power can allow airports to raise prices, deliver inadequate levels of service quality and scale back investment. That can harm consumers by, among other things, limiting airlines’ ability to offer passengers choice and value. I leave the Committee with an example that might indicate that the continued economic regulation of airports is justified. When the cold snap hit, unregulated airports such as Manchester and Newcastle seemed to make a much better fist of their response than Heathrow did. Passengers continue to need protection, and we must ensure that the CAA has effective powers to protect them.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.

Clause 7  - Market power determinations

Question proposed, That the clause stand part of the Bill.

Theresa Villiers: I will be brief, because clause 7 is relatively straightforward. Subsection (1) empowers the CAA to determine whether the market power test is met in relation to an airport area whenever it considers it appropriate to do so. To comply with provisions in the airport charges directive, subsections (2) to (4) of clause 7 also require the CAA to make a market power determination in respect of an airport area if it is requested by the operator of that area or by a person who is likely to be materially affected by the determination; if the request consists of or includes all or part of the core area of the airport—broadly speaking, at least one of the runways and associated facilities, passenger terminals or cargo processing areas; and if the request concerns an airport with more than five million passenger movements in the previous year.
Under subsection (5), the obligation on the CAA to conduct a market power test on request does not apply if it has previously made a market power determination and considers that there has not been a material change of circumstance since that determination. That is because such a determination should not differ from the previous one, so it would be a waste of time and resources to carry out a new one.

Question put and agreed to.

Clause 7 accordingly ordered to stand part of the Bill.

Clause 8  - Publication of market power determination

Question proposed, That the clause stand part of the Bill.

Theresa Villiers: Clause 8 contains provisions for the publication of market power determinations that the CAA makes under clause 7. Under subsection (1), after making a market power determination the CAA must publish a notice of the determination as soon as practical and send a copy to the operator of the airport area that is subject to the determination; to any other person who requested the determination; and to any bodies representing airport operators or airlines that the CAA considers appropriate.
If the CAA’s notice under subsection (3) does not include the reasons for the market power determination, the CAA must publish them as soon as practical and send a copy to those who received the original notice. Given the significance of such decisions, it is important that the CAA is required to publish them, and the reasons for them, as soon as is practical. An existing market power determination subsists until notice of a further market power determination is published as set out in clause 7(9). Accordingly, it is requisite to impose the specific duty for publication on the CAA.

Question put and agreed to.

Clause 8 accordingly ordered to stand part of the Bill.

Clause 9  - Operators of areas

Question proposed, That the clause stand part of the Bill.

Theresa Villiers: Clause 9 defines an operator of an airport area as the person who has overall responsibility for the management of all that area. That means that where two separate entities both have some form of management control over an airport area—for example, the lessor and lessee of a passenger terminal building—only one of them will be defined as the operator of that area for the purposes of the clause, so only one of them can be made subject to regulation.
It is important to be able to identify a single operator of an airport area so that it is clear who exercises requisite control for regulatory purposes. In some cases, for example where there are complicated leasing arrangements, it may not initially be clear who the airport operator is. The CAA believes that the current structure of designated airports is unlikely to give rise to difficult issues in that regard.
Subsection (2) empowers the Secretary of State by regulations to make provision about when a person is or is not to be treated as having overall responsibility for the management of an airport area. Subsections (3) and (4) provide that the regulations may, in particular, make provision for determining who the operator is where specified matters, such as access to and development of the area, are controlled by different persons.

Nigel Mills: Will the Minister comment on how the measures would work where a group of companies own multiple airports? Would the operator be the individual subsidiary, say East Midlands Airport Ltd, or would it be Manchester Airports Group? That may be relevant where one company owns more than one airport in a market area. One may want to test whether the combined effect of the ownership leads to dominance or market control, whereas the individual airport perhaps would not.

Theresa Villiers: The answer will vary depending on who is actually in control in the sense that I have just outlined. However, my hon. Friend is right to say that the factors that the CAA will take into account will include ownership of other airports. The legal operator will be the one that is ultimately licensed.

Mike Freer: On subsection (1), will the Minister clarify whether, in
“overall responsibility for the management of all of the area”,
“all of the area” means the perimeter of the airport or all operational areas within the airport?

Theresa Villiers: As I outlined in relation to earlier clauses, we have a distinction between core and non-core areas, and the reason for that is essentially to ensure that we do not accidentally give the CAA authority to start regulating, for example, car parks where they are not associated with airport facilities, such as runways and terminals, where there is the exercise of substantial market power and where the appropriate tests in clause 6 are satisfied. We have this slightly complex system to ensure that peripheral areas, such as car parks, will not be subject to airport economic regulation unless they are linked to an airport where there is a dominance that covers core economic services, such as a runway or terminal facilities.

Graham Stringer: On a point of order, Mrs Riordan, may I have some guidance? Clauses 9 to 12 all deal with competition within terminals, and, although it is not a four-clause stand part debate, I would like to talk in general terms about all four clauses.

Linda Riordan: If the clauses are related, of course you can.

Graham Stringer: Clauses 9 to 12 are sneaky clauses, because they effectively provide for secondary legislation to determine that there will be competition within terminals. In those airports with more than one terminal, which—there may be others—seems to be Heathrow, Gatwick, and Manchester, no case has been made that there is a problem or that they would be improved by having competition within those terminals, and there is no experience in this country of having such competition. Rather than include “just in case” legislation, which may create a burden on people in the future when no case for it has been made, it should not be there.
What we know from experience of John F. Kennedy International airport—I guess that many Members of the Committee will have travelled to New York through JFK, where each of the many terminals is handed over to an airline or several airlines—is that it is a very expensive and inefficient airport. So, where we have international experience, it is not good experience, and where we have domestic experience, it shows that there is no need for this change. On that basis alone, we should not create a power whereby, just through the use of secondary legislation and a statutory instrument, this change can be introduced without proper, full debate and discussion about some of our country’s important economic assets. Again, that indicates to me that this is a regulatory Bill rather than a deregulatory Bill.
If one gets down to specifics, there is not a problem, but if one looks theoretically at what might happen—as these clauses ask us to look—I would speculate, and international experience would almost certainly support my speculation, that we would get increased costs and capacity issues related to those increased costs; that it would be very difficult, given the configuration that we have in this country, to cater for different airline needs; that there would be transactional costs as one moved from one regime to another, which all Governments of whatever party always underestimate; that it would be more difficult to plan; and that it would be difficult to make price controls that were transparent and fair.
I will talk a little, first of all, about differing airline needs; I can talk in some detail about Manchester airport, but less clearly about Heathrow and Gatwick. The third terminal at Manchester, which I was responsible for signing the contract on, was specifically designed for British Airways to be the centre of its European network of airlines. Because of the changes in the aviation industry, BA has consolidated, primarily into Heathrow and Gatwick. That has left us with a terminal in Manchester that is not suitable for package holiday flights.
I just use that example to show that terminals are not always as flexible as one might expect them to be. If one was to consider how to introduce competition into that terminal, one would find that it would be very difficult to do so. The same is true of the second terminal at Manchester, which opened in 1993 and which I was also responsible for. It has a very simple design; passengers come in at one level and go out at another level, and it is designed entirely for international traffic. It would be very difficult to mix it up with domestic traffic. If one was to introduce competition, there would be large costs involved in changing that second terminal over. There are specific air-bridges designed for the kind of tour operators that use it.
Is anybody seriously saying that, by introducing competition, the costs of running an airport, or even the costs of a single-terminal operator, would be reduced, if there was the much more complicated situation of two operators operating in the same area? Unfortunately, I am old enough to remember when the European regulations came in that demanded competitive baggage handling even though there was not sufficient space for competitive baggage handling within a lot of airports. Baggage handling became not more efficient but less efficient, because there simply was not room to handle the baggage when there were three separate operators. That was a European directive—it was not the Conservative Government of the time—but it was particularly unhelpful for running an airport.
There are also capacity problems. If one is to have competition, which means, I suppose, that different operators operate parts of a terminal and offer different prices for different airlines to use it, it is possible only if there is spare capacity. We have to be able to move from one to the other or to expunge somebody’s contract. Again, spare capacity is likely to increase inefficiency and costs.
I have mentioned the transactional costs of moving from one regime to another. I have never known any Government of any colour to get the estimates right for the transactional costs of moving from one regime to another. Any estimate can normally be multiplied by three.
Airlines think that they decide where they go and that they are mainly responsible for bringing in customers to an airport, but—I have done this myself—airports, particularly competitive airports in the regions that have it much more difficult than Heathrow and Gatwick, are going out to try to attract airlines into their terminals. If an airport wanted to attract Malaysia Airlines into a terminal, it would be much more difficult if it had to negotiate with two different operators. If an airport wanted to bring business to this country and to the city in which it operated, the proposal would be another unnecessary hurdle to attracting such business. Finally, price controls would also add complications.
This is a particularly ill-thought-out proposal. I do not where it came from. There is not a problem; if there were a problem, this would not be the solution. I hope the Minister will withdraw these clauses, which all address the same issues, or else I would hope to press at least one of them to a vote.

Julie Hilling: I also want to address all four clauses. I contemplated giving the same speech four times to see whether I would improve each time, but I do not think the Committee would appreciate that, so I will speak once to all four clauses.
The proposal, which will allow an airport to be compelled to transfer a terminal to another operator, has been said to be an idea without merit. There is no industry clamour for it, and I have been told that it has been included just in case, in the future, someone somewhere decides that it is a good idea. Well, I am sure there are lots of things that we might want to put in a Bill just in case someone somewhere, in the future, decides that they are a good idea, but, rightly, we do not do it.
I will outline why I do not believe it would be a good idea to have these clauses in the Bill and why they should be removed here and now. My local airport is Manchester airport—I should declare an interest because, like every other citizen of Greater Manchester, I am effectively a shareholder in the airport because it is owned by the 10 metropolitan boroughs—and it is not only located in the area, but rooted in the community. Of course, Manchester airport wants to make profits and to have as many routes as possible, and, of course, it sees itself as fundamental to the economic growth and health of the region, but it also wants to be as good a neighbour as possible.
The airport operator plans for the whole airport, and it has to deal with the airport’s neighbours and take account of environmental concerns. It has to consider how to get passengers and workers to and from the airport, it has to invest in transport infrastructure and improvements to the terminals, and it has to provide a good service to passengers and airlines. Basically, it has to take a strategic overview of all airport operations and implement them practically.
Now imagine a situation in which the airport is split and another operator takes over the running of a terminal. There is an immediate decrease in capacity. Currently, an airport such as Manchester carries some headroom across the airport as a whole. Where necessary, flights can be transferred to any of the three terminals, so excess capacity is as small as it needs to be. If a terminal is transferred, each operator would have to build in headroom, thus immediately decreasing overall available capacity.
There are also economies of scale; the benefit of one efficient operation would diminish and, as my hon. Friend the Member for Blackley and Broughton said, the transactional costs would increase enormously. Manchester Airports Group is effective because it can negotiate with suppliers and other interested parties to get good deals. Good contracts with companies such as Smiths Group, SSP and Compass Group and with brands such as Costa and Burger King would disappear, meaning that the airport would be less financially secure and there would be higher charges for passengers. If we want to increase the employment opportunities for accountants and solicitors, this is the way to go. A great deal of time and money would be wasted in legal agreements between the two operators. Bean counters would have a fine time working out how things such as car parking fees should be allocated.
What would happen if one of the operators did not want to invest in general improvements? Manchester airport recently made a large investment in the airport railway station and it is about to invest £50 million in bringing Metrolink to the airport. What if another operator is in competition at the airport and it does not want to invest? The airport cannot say that only those passengers travelling from terminals 1 and 2 can catch the Metrolink and everybody travelling to terminal 3 has to walk.
Competition is not good for its own sake; it is good only if it brings improvement to the whole operation—for passengers, freight, the environment and the community. It does not matter that I have two buses to choose from if I cannot afford to catch either. The bodged privatisation of rail should be an example of what not to do—ever rising prices and no real competition. It does not matter who runs Atherton station; I have the choice of only one station and only one sort of train, and that is common across the whole rail network. It is rare for any of us to have any real choice between operators and routes.
There is a never-ending cycle of blame on the railways. Whose fault is it that the train is late? Network Rail? The operator? Who owes whom money? We do not need to bring that same sort of competition into the air industry. There is competition of a different nature, so we do not need to reduce it down to what I see as ridiculous airport terminal competition.
The clauses that potentially enforce the transfer would not improve our airports. Transfer is not wanted, it would not benefit anybody and we do not need the “What ifs?” The clauses should go or, at the very least, apply only to regulated airports. The amendments I tabled were not selected, but I hope that the Minister will omit the clauses. If that is not done at this stage, I will certainly table amendments again on Report.

Ordered, That further consideration be now adjourned. —(Bill Wiggin.)

Adjourned till Thursday 1 March at half-past Nine o’clock.